Hedging with Harmonic Patterns

Video Transcription:

Hello, traders. Welcome to the Pro-Trading course and the sixth module, “Hedging.” In this lesson, we are going to learn how to hedge with Harmonic patterns. Well, not exactly hedge with Harmonic patterns but how to use Harmonic patterns to hedge your positions. We’re going to go back to the… Well, this is the Crude Oil chart, and as you remember we had a long position from 35.32 and our first targets were around this level of resistance, which was composed by this high and this low.

So I’m going to go ahead and show you where our targets were actually positioned. If you remember correctly, we had actually this entire zone as our target area, well the first target area in that case. But if we want to hedge this position, this would mean that we need to be at a hedge ratio and if you look closely, well, this is a Butterfly pattern. We have retraced 27.2 from this low to this high. We have retraced 88.6 from this high to this low. If you look closely, we are here at the 161.8 for the completion of the Butterfly pattern.

Now this is very interesting because the 161.8 is the retracement from this high to this low. Price has retraced 161.8% off the move from this high to this low, which means that we are in a hedging ratio which would mean that this is a great spot to look for a hedge. Not only we are inside of a hedge ratio, we are also at the 161.8 retracement from this high to this low. And we are at the completion of the Butterfly. So, we have all of this going on for us but remember we don’t know if price is going to retrace. Well, go for a retrace before breaking through this area of resistance or if it’s going to fully reverse at this point. Well, it really doesn’t matter to us because what we are going to do is we are going to hedge our position at the completion of the Butterfly pattern.

Now this is where it gets interesting, and of course we are going to take half of our position off right here and only hedge half of our position because we are only riding half of our position from the long side. So, we are going to go ahead and short crude for half a position, with our stops above the 161.8 or above the previous high, above this area of resistance. And what happens is that price is going to move down. It is very likely that price is going to move down because not only we have the area of resistance and the hedging ratio, but we also have the completion of a Butterfly. The butterfly or the Harmonic pattern is not only going to help us to look for hedges, but also where to look to end our hedge.

So what we are going to do is we’re going to grab our Fibonacci ratio, and we’re going to go from the low of the high of the entire bearish cycle. And we find that we are always going to be looking to exit between the 50 and the 61.8. Why? Because we are going to look for this. You can see that price move up, then move down and then up again. This is what a bearish cycle looks like. I know it’s kind of off-topic because we are moving up, but remember that this is a bearish formation and we are always going to be looking for that previous base. Now that previous base comes between the 50 and the 61.8. So what we are going to do is we’re going to be finishing our hedge at around these levels, alright? So I’m going to color this green, so we don’t mistake it with the other entries and we are going to see what happens here.

Boom! We get filled to the tick on our position, so it’s basically better to put it just above the 50, alright? Not looking to make the most profit out of the hedge but looking to be taking out on a profit before price moves up. So we are going to look on that 50 Fibonacci level to take off that hedge and if price moves…we are going to be taking out on a profit of about, in this case 137 ticks, and what happens then after that the price continues to move up. By hedging perfectly with the Harmonic pattern, not only we are already making 515 ticks on the long side but we also managed to squeeze out of the market 135 pips on the short side with our hedge.

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